The UK’s fast-growing BNPL sector is entering a pivotal phase as it transitions to full FCA oversight, with providers adapting to new compliance, transparency, and consumer protection standards.
The UK’s Buy Now Pay Later (BNPL) sector in 2025 stands as one of the fastest-growing payment types. With transaction values forecasted to reach £27.1 billion this year, BNPL has evolved from a niche offering to a mainstream payment option that retailers and consumers increasingly adopt.
Yet this expansion now unfolds against a backdrop of significant regulatory transformation. Following the publication of draft legislation in October 2024, the industry has begun its transition toward comprehensive oversight by the Financial Conduct Authority (FCA). This landmark shift aims to bring BNPL products fully under regulated financial services, requiring providers to implement robust affordability checks and ensure much greater transparency in their terms and conditions.
As Teresa Connors, ambassador of The Payments Association, notes: “While BNPL is not always seen as a loan, it provides short-term consumer finance without the regulatory protections typically associated with other lending products. With increasing regulatory scrutiny, including Consumer Duty, the landscape is shifting toward stricter oversight and higher standards for transparency and customer outcomes.”
The sector currently operates in a complex interim period. Providers are actively preparing their systems and processes for full implementation, which is expected by 2026. This transitional phase has already created a distinctive two-tier market: third-party providers are preparing for comprehensive regulation while merchant-provided options remain largely exempt. The regulatory journey reflects mounting concerns about consumer protection, with research showing 44% of frequent BNPL users were already over-indebted before regulatory intervention began.
“With increasing regulatory scrutiny, including Consumer Duty, the BNPL landscape is shifting toward stricter oversight and higher standards for transparency and customer outcomes.”
– Teresa Connors, ambassador, TPA
These upcoming rules will require substantial adjustments to business models across the industry. Providers face the challenge of implementing stricter eligibility requirements while maintaining the seamless checkout experience that has fuelled BNPL’s rapid adoption. “The biggest challenges will be the costs to firms in implementing these changes whilst ensuring friction is still reduced as much as possible on merchant user flows and retaining similar levels of conversions for buy now pay later agreements with customers once the rules take effect,” explains Gavin Punia, partner, Bird & Bird.
While these measures will increase operational and compliance costs for providers, they are widely expected to strengthen consumer confidence and contribute to the sector’s long-term sustainability.
The introduction of regulation has created a divide in the BNPL market. BNPL agreements offered by third-party lenders will be subject to the new regulatory regime. At the same time, those provided directly by merchants will remain exempt under Article 60F(2) of the Regulated Activities Order (RAO), establishing what industry observers describe as a two-tier system with significant competitive implications.
Third-party providers, such as Klarna and Clearpay, face comprehensive FCA authorisation and compliance obligations, whereas retailers offering direct instalment plans operate without oversight. The impact is already evident, with some lenders expected to exit the market when faced with stringent authorisation requirements and compliance frameworks, potentially impacting competition in the sector, customer choice, and overall credit provision. Market pressures are tangible—Openpay cited a “high degree of competition for merchant acquisition,” which led to “lower margins” when exiting the UK retail market.
To prevent circumvention, HM Treasury included an anti-avoidance mechanism in Article 60F RAO to ensure that third-party lenders with merchant arrangements remain in scope. Future harmonisation remains uncertain, although HMT commits to continuing to closely monitor the profile of the merchant-provided credit sector and to respond if significant changes or potential consumer harm are detected.
BNPL providers are navigating the complexities of operating under the new regulatory framework, with particular focus on implementing robust affordability assessments and enhanced consumer protections. The draft SI includes an Initial Commencement Date (likely to be in 2025), with a 12-month period within which the FCA will consult on rules for the new regulated regime. Firms will need to demonstrate that they are undertaking relevant deferred payment credit (DPC) activities, have registered with the FCA, and have paid the relevant registration fees to qualify for the temporary permissions regime.
“To ensure regulatory standards are met, firms will need to assess their end-to-end operations,” says Teresa Connors. “This includes a thorough review of marketing practices, customer communications, credit assessment protocols, documentation, reporting and complaints handling. Governance and compliance frameworks must meet regulatory expectations—this will help mitigate reputational and conduct risk.”
Third-party BNPL lenders will need to upscale their operations to meet the FCA’s conditions for authorisation, with firms expected to have effective compliance functions in place, given the FCA’s historic focus on financial promotions and unfair contract terms.
“UK BNPL firms face a major regulatory shift as FCA oversight begins by 2026,” says Zahra Ellahi, associate director, financial services advisory, consulting, risk & outsourcing, BDO. “The most apparent obstacle is implementing mandatory affordability checks, requiring firms to assess consumers’ ability to repay before extending credit. This disrupts the fast, frictionless model BNPL relies on, increasing compliance costs and potentially reducing user uptake. Firms must invest in credit risk systems, redesign user journeys, and prepare for full FCA authorisation to remain competitive.”
“The most apparent obstacle is implementing mandatory affordability checks, requiring firms to assess consumers’ ability to repay before extending credit.”
– Zahra Ellahi, associate director, financial services advisory, consulting, risk & outsourcing, BDO
Key practical changes include mandatory affordability and creditworthiness assessments as a regulatory requirement, in accordance with FCA rules, alongside reporting to credit agencies and enhanced oversight of promotional practices under the financial promotions regime.
The persistent challenge of consumer understanding remains at the forefront of concerns in the BNPL sector. When asked whether users understand BNPL risks and how transparency can be improved without reducing checkout conversion rates, industry experts acknowledge that significant gaps remain.
Many users still underestimate BNPL risks,” according to Louise Hill, CEO and co-founder of GoHenry, speaking to Payments Review. Hill emphasises that addressing this requires fundamental changes to how information is presented, making “it essential to simplify terms using clear, straightforward language, highlight key risks by displaying potential fees and consequences prominently.” She suggests that “educational prompts with brief, informative messages during checkout could help with informed decision making.”
Building on research from Which? that found many users underestimate the risks of BNPL, industry practitioners are implementing practical solutions. When asked how they are improving transparency without reducing checkout conversion rates, Kevin Flood, director of payments ecosystem strategy, Europe, at FIS Global, describes a comprehensive approach: “Companies are making repayment terms more visible through enhanced disclosures, simplifying presentation of terms and risks with user-friendly interfaces, and providing pre-purchase reminders and educational prompts during the checkout process to educate users about responsible borrowing and the potential impact on their credit scores.”
“With BNPL options becoming increasingly prominent online, it’s imperative that young people understand exactly what BNPL is and what they could end up paying if they miss payments.”
– Louise Hill, co-founder and CEO, GoHenry
The GoHenry research, exclusively shared with Payments Review, reveals the scale of the challenge among younger consumers. As Hill explains: “With BNPL options becoming increasingly prominent online, it’s imperative that young people understand exactly what BNPL is and what they could end up paying if they miss payments.” The research, conducted by Censuswide with 1,000 UK respondents aged 10-18 between September 16-20, 2024, shows that 81% of kids and teens are already familiar with BNPL services, yet 38% mistakenly believe BNPL can be used to purchase anything.
The integration of technology, including artificial intelligence, represents one approach being explored in BNPL risk assessment and consumer protection. However, the practical implementation of AI-driven solutions has proven more complex than initially anticipated, with some major providers recently moderating their AI ambitions.
When asked about the use of technology in enhancing affordability assessments, Flood details the potential benefits whilst acknowledging current limitations: “AI tools may offer improvements to affordability assessments and help tailor repayment options, though the technology is still developing. BNPL companies are experimenting with algorithms and data analysis to better understand spending patterns and credit history, but creating truly personalised repayment plans that work reliably remains challenging.”
This technological approach represents a gradual shift from standardised methods, though providers are finding that balancing algorithmic assessment with regulatory requirements and consumer protection proves more complex than anticipated.
With regulatory standardisation creating a more uniform baseline for BNPL products, providers are seeking new avenues for competitive advantage beyond traditional credit offerings. As competition intensifies, providers focus on differentiating their services through lower fees, extended repayment periods, and seamless digital integration to attract and retain customers.
“BNPL is increasingly recognised as an inclusive payment method for many consumers, allowing them to build around their lifestyle. Whilst further regulation is welcome in the wake of the Consumer Credit Act review, it must be proportionate and suitable,” remarks Willem Wellinghoff, chief compliance officer, Ecommpay. “Balancing the UK’s competitiveness and innovation, aligning with the National Payments Vision, remains critical.”
Sector diversification represents a key differentiation strategy. BNPL providers have begun offering instalment payment options in industries such as healthcare and travel, allowing consumers to finance medical expenses, elective procedures, and vacation costs over time. Companies are adjusting their services to offer customised instalment plans for different sectors.
“Balancing the UK’s competitiveness and innovation, aligning with the National Payments Vision, remains critical.”
– Willem Wellinghoff, chief compliance officer, Ecommpay
Technology-driven personalisation is being explored as a potential competitive advantage, though with mixed results. Whilst some providers continue to invest in data analytics to improve risk assessment, others have scaled back their AI ambitions after encountering practical implementation challenges. The promise of AI to significantly reduce defaults and improve customer loyalty remains largely unproven, with the industry adopting technology more cautiously than previously anticipated.
This provides a much more realistic picture of where AI currently stands in the BNPL sector, especially given Klarna’s recent pivot away from its earlier enthusiasm for AI.
Environmental, social, and governance considerations are becoming central to BNPL strategy development. When asked whether ESG-linked products, such as ‘green BNPL’, are a priority and how they align with UK consumer demand, industry observers confirm their growing significance.
“ESG-linked products, including ‘green BNPL,’ are becoming increasingly more relevant as consumers and businesses push to prioritise sustainability,” according to Flood. The commercial rationale appears compelling, with evidence of “growing demand for ethical financial products”, he adds.
The BNPL sector enters a critical inflexion point that demands decisive leadership as regulatory implementation approaches by 2026. Executives face converging pressures that industry experts summarise as “increased regulatory scrutiny, rising default rates, and economic pressures impacting consumer spending, profitability concerns as providers need to balance growth with sustainable business models, and managing the risk of users accumulating unsustainable debt.”
This narrow transformation window necessitates substantial capital investment in compliance infrastructure, technology upgrades, and enhanced risk management capabilities.
Organisations must simultaneously decide whether to compete on regulatory compliance as a market differentiator or accelerate diversification into AI-driven personalisation, sector expansion, and ESG initiatives. The organisations that emerge as sector leaders will be those whose executive teams can execute flawless regulatory transition whilst building sustainable competitive advantages that extend beyond commoditised core BNPL products in the post-regulation landscape.
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